Specialty Retail Industry

Industry Overview

Some 400,000 specialty retail stores operate in the US with combined annual sales of $350 billion

CAGR 2002-06: 5%

Market is dominated by large players like Best Buy, Toys “R” Us, Gap, Sports Authority, etc

The market size of some major product categories:

o Shoes and clothing - $125 billion

o Electronics and appliances - $85 billion

o Jewelry - $25 billion

o Sporting goods - $25 billion

o Books - $25 billion

Other categories include Toys, Music, Luggage, Pet supplies, etc

Specialty retailers cater to a narrow or niche audience – either by location, type of customer or product mix. On a national level, specialty retailing is dominated by national chains, such as office supply store Staples or electronics outlet Best Buy.

However, on the local level, specialty retailing is defined by independently owned, unique shops that express the personalities of their owners. These small retail outlets -- shoe stores, food stores or book stores -- have become the bedrock of downtown and urban redevelopment across the country.

Industry Statistics Dec 2007

Valuation Ratios

P/E(ttm) 22.80

P/Sales(ttm) 1.34

P/Book(mrq) 13.07

P/Cash Flow(mrq) 11.17

Profitability(ttm)

Gross Margin % 34.59%

Operating Margin % 9.54%

Net Profit Margin % 9.19%

Financial Strength (mrq)

Quick Ratio 0.49

Current Ratio 1.46

LT Debt/Equity 110.07

Total Debt/Equity 118.25

Mgt. Effectiveness (ttm)

Return on Invstmt % 13.23%

Return on Assets % 9.09%

Return on Equity % 25.77%

Key Issues

The growing popularity of online retailing is attracting competition from traditional and online multi-retailers such as Wal-Mart and Amazon which are gaining considerable market shares in many of the product segments included in the specialty retail sector.

Currently majority revenue is generated by store sales but online sales from the stores’ websites are increasing. With US dollar getting weaker, international sales from these US based websites are increasing too. This creates significant positive outlook for the large incumbent players but also acts as a significant barrier of entry for new players.

Moreover, despite the presence of some large chains, specialty retail markets are highly fragmented. Barnes & Noble, for example, with over 900 stores, is the largest US bookseller but has a market share of only 15 percent.

With increasing transportation costs and tighter margins there is a possibility that some large specialty retail players will consolidate assets, knowledge and outsourcing capabilities in order to generate economies of scale and scope.

Key Opportunities

High-end and niche merchandise: With rising disposable incomes the demand for high-end goods in increasing, which can best be catered by specialty retail stores. Large players can offer competitive prices as they buy in bulk. Smaller players can differentiate themselves by offering niche products and superior customer delight at a premium price.

Store environment: Specialty retailers can focus on shopping experiences by providing more comfortable, ergonomic store environments. This way they will differentiate themselves within the marketplace, especially against large discount retailers, within which such qualities are generally lacking.

Emerging Landscape

пЃ¶ Small and marginal players: Growing popularity of online retail has motivated people with novel product concepts to start selling through standalone websites. Often these